The mathematics of direct marketing primarily rests on three key elements:

Sales

Marketing Costs

Contribution Costs (e.g. Overheads)

Now there is no clear-cut balance for these elements as any direct marketing activity needs to be tailored and fine tuned according to each business. This is why I will never state off-the-cuff a direct marketing response rate for any business or industry type as there are significant variables involved such as the product itself, the demand for it, market preference and the nature of the offer.

Another point to highlight is that the mathematics used is underpinned by the belief that the future will be similar to the past. Hence if any variable within the equation changes significantly (e.g. magazine circulation significantly declines), then you have to expect a different response rate.

So to dive straight into it, I’ve listed below a few essential calculations which every small business should use:

Calculating the Allowable Using Your DM Budget

This equation lets you calculate the amount of money you need in order to make one sale. This is really important to know!

Revenue Selling Price: $1000

Minus Costs Production: $500

Overheads: $150

Postage & Handling: $50

The Breakeven allowance is $300 (the money you are allowed to spend to acquire a customer).

NOTE: If your business requires 10% profit, then your allowable would effectively be reduced to $200.

It is essential to test the market first using a small quantity before rolling out the entire campaign. Typically your allowable is based on what resources are required to acquire a customer already, plus I would expect some form of marketing research carried out in order to understand the size of your potential market. It is also important to include contingencies within your marketing activities if you don’t make the required sales. I always save 10% of my budget if something goes wrong. Or better still, if a potential list I’m targeting returns a huge ROI, then I have a bit left over to chase the money and market these top prospects again.

Measuring Costs, Responses and Sales

Here are a few very simple, yet essential equations to help measure costs, response and sales:

Cost per Unit:

Total cost / Total Quantity = Unit Cost

e.g. $20,000 / 4,000 = $5

Response Rate:

(Total Responses / Total Mailed) x 100% = % Response

e.g. (200 / 1,000) x 100% = 20%

This equation is exactly the same as measuring the Conversion Rate which would be Converted Leads / Total Leads Contacted

Cost per Sale:

Total Cost / Total Sales = Cost per Sale

e.g. 20,000 / 500 = $40

Example: Let’s say you were a travel insurance broker wanting to advertise in the local newspaper to sell premium travel insurance for $500 per person. I’ve listed some assumed sales and marketing costs to acquire a customer:

Advertising Cost: $7,800

Newspaper Circulation: 150,000

Promotional Cost: $5 per lead (e.g. Call centre costs)

Revenue per sale: $500

Total Marketing Cost for 100 leads is therefore: $8,300

The Cost per Inquiry or Sale will vary depending on the response rate, which you won’t know until you advertise. But the main focus on advertising is to achieve a required level of profitability in order to justify the expense. I like to refer to it as measuring the Profit Index. (This is exactly the same as using your allowable to calculate the number of sales you require in order to justify any marketing spend).

Profit Index (%) = Total Marketing Cost / Total Revenue

Profit Index (%) = 8,300 / 10,500

In this instance the Travel Insurance company requires 20% profit from print advertising. If my profit Index falls below 20%, then the advertising is deemed unprofitable. I’m so harsh!

Hence, 21 travel insurance premiums need to be sold to meet a profit index of 21%.

In other words, the allowable DM Budget would be set at $8,300 for advertising in the Local Newspaper.

Using Spreadsheets to Negotiate Spend

If you’ve seen the spreadsheet then you’ll wonder why I’ve highlighted the following cost fields – Ad Cost and Promotional Costs. Promotional Costs are harder to change in the short term, but negotiating advertising costs can be extremely effective. You’d be amazed to discover that by saving 10% of advertising you drive down your Profit Index, which means your advertising dollar doesn’t have to work as hard to acquire customers or sales. In the example used, you would only have to sell 19 Travel Premiums in order to meet the minimum profitability requirements. It also does hurt asking for a trial advertising rate to test the viability of a product in a publication. Some account managers will assist if it means you become a regular advertiser.

There are a couple of examples which the above calculations can be applied to in order to gain some further perspective for your next lead generation campaign.

Lead Generation Conversion Programs

1. Generally the more time you have to qualify an enquiry, the more it costs to generate. For example, if your telesales representative took 15 minutes to convert a prospect, while others may take only 5 minutes, then this will drive your overall costs to acquire a customer, and must be factored into your overheads or marketing costs.

2. Lead generation lists (Prospect Lists) can also support repeat conversion contacts, but you’ll always get a reduced response rate with each effort. For example, if you mailed 1,000 prospects, it may generate 250 leads. The second time you mail the list (minus the 250 leads you generated the first time round), you might get another 100 leads. This means you have generated a total of 350 leads from the prospect list. But we wary that if you use the list too many times then it will get to the point of being unprofitable.

As a general rule of thumb, you should change a portion of the DM piece the next time you mail (e.g. The offer, or a larger discount), as customers may respond to varying aspects of your direct marketing campaign, which is why it is always important to test.

You may hear direct marketing consultants talking about list building, and how much of their time is dedicated to developing a database of qualified prospects and customers. These lists are in fact a key ingredient which differentiate direct marketing from traditional marketing.

But I will say that typically, a list of present customers will respond much better or at a higher rate to a new product compared to non-qualified, or “cold” prospects.

It is also important to point out that while companies always depreciate their expenses over time such as equipment, machinery and inventory, they almost never capitalise what could be their most important asset, their customer. Therefore, small business owners should view their customers as investments and be able to measure and monitor customer data, and capitalise on it for the future.

Just remember that the maths of direct marketing sets it apart from all other marketing disciplines!

Direct marketing techniques have over recent years become more sophisticated in order for businesses across many sectors to be able to compete with the best or to at least maximise their potential client base. Direct marketing techniques have not become more sophisticated in terms of making drastic changes, but the way in which certain aims and objectives are approached. Profiling and targeting is just one of those direct marketing techniques in which the approach has changed over recent years.

Companies that undertake direct marketing campaigns have had to change due to other marketing techniques being not only very popular, but also very competitive. For example, over the past decade or so, on-line marketing has become one of the most used marketing methods, but at the same time it’s the most competitive and can cost a fortune to ‘get noticed’ on-line; not always the case, but is a regular occurrence.

What does Profiling and Targeting enable Businesses to Achieve?

Profiling and Targeting enables businesses to target certain types of people; class, background, interests, gender and so forth. This certainly helps businesses to target individuals or groups of people that are more likely to be interested in the service or product that the business is offering. For example, SAGA, who specialise in services and products for the over 50’s group would not be maximising their marketing campaign if half of their leaflets were distributed to home owners that are under 50.

Therefore, there is much less chance of the marketing budget being wasted. Even though a business may profile and target their clients in a professional manner, this does not guarantee a successful direct marketing campaign. Other elements of the campaign must also be enticing, relevant and stand out from the competition I.e. a company should brand their products, services etc so that they appeal to the market in which they are trying to target; you would not have a dull looking leaflet if you are promoting holidays abroad – it just doesn’t work!

Whereas, if the leaflet stands out and appeals to the correct target audience, then there’s more chance of maximising your profits or achieving your overall aim of the direct marketing campaign.

How Does Profiling and Targeting Work?

OK, so once you’ve decided upon the type of marketing technique(s) e.g. leaflet distribution, there are certain aspects that need to be analysed on an in-depth basis – no stone should be left unturned, after all it’s your money that could not only be wasted, but leave you with the impression that your campaign didn’t work for the wrong reasons.

These are the steps in which you need to take when it comes to profiling and targeting effectively: –

Quality Assurance through planning – aspects such as identifying your target market (social class etc), decide on the number of leaflets you will distribute are determined at this stage.

Geo demographic targeting – some direct marketing agencies will use software that targets customers demographically and can be the difference between a very successful and not so successful campaign.

Analyse statistics – ensure that statistics used from data bases are analysed in-depth so that opportunities are less likely to be missed and acted upon.

Direct marketing agencies that provide targeting and profiling services should be able to give you a good insight and understanding of what is required and the steps that would be potentially best to follow.

Procedures must also be followed but also flexible when needed to be i.e. agencies should be able to adapt to problems/issues in order for your business to gain maximum exposure.

Direct marketing is good only for mass marketers and mail-order firms.

Sales and marketing executives, influenced by the number of mailings they see for magazine subscriptions and mail-order firms, may conclude that direct marketing is unsuited for their business. Mail order is only one purpose for direct marketing and rarely sells anything through the mail, is not appropriate for big-ticket items.

Although it’s a challenge to sell an expensive item strictly by mail order, direct marketing can play an important part in generating leads and in supporting the efforts of salespeople, has been used to help sell diamond jewellery, sports car, expensive travel, real estate, yachts, antiques and collectibles, mutual funds, and just about every other product you can think of.

Direct marketing is accountable. It’s advertising you can justify and track. It’s ideally suited for small business, it can be adopted to fit your budget and your changing business goals. Originally direct marketing referred to a direct sale, as in mail order, but today it’s used to accomplish many marketing goals. Direct mail and direct marketing are sometimes mistakenly used interchangeably, may take many forms and use most media; it is not limited to the mail although mail is the most popular medium, gives you many options beyond sending self-contained mailers, and it includes most, if not all, advertising media.

-Magazine and newspapers
-Telemarketing
-Free standing inserts

Direct marketing focuses on providing benefits for buyers, and the chapters on constructing creative mailers and campaigns focus on the power of benefits.

If you don’t already think about your marketing in terms of benefits, now is a good time to start. Direct mail is like no other form of advertising in that you control the medium and the message. When you buy an ad in a magazine or newspaper or a commercial on the radio, you’re buying only a portion of the medium. With direct mail your message is alone. You control everything, from the size, texture, and colour of the paper you use to the number of pages and the way you address your potential clients or customers. In addition to controlling your message, you control who receives it and when. You can send one message to your existing customers and another to potential ones, or in the case of business mailings, to people in a specific industry or profession.

Direct marketing is the most testable form of advertising. Every mailing and every direct response advertisement you run is an opportunity for you to test something and gain information that can help improve your marketing in the future.

To be effective in direct mail, it’s not necessary to mail to every breathing human being, just to those people who are your most likely customers or who are already your customers. Start thinking in terms of precise targeting